G.R. No. 191761 ; November 14, 2012
CAGAYAN ELECTRIC POWER AND LIGHT CO., INC., Petitioner, vs. CITY OF CAGAYAN DE ORO, Respondent.

FACTS

On January 10, 2005, the Sangguniang Panlungsod of Cagayan de Oro enacted Ordinance No. 9503-2005, imposing a tax on the lease or rental of electric and telecommunication posts, poles, or towers by pole owners to other pole users. The tax was set at ten percent (10%) of the annual rental income derived from such lease. The City informed petitioner Cagayan Electric Power and Light Co., Inc. (CEPALCO) of the ordinance’s passage. CEPALCO, a franchise holder, filed a petition for declaratory relief before the Regional Trial Court (RTC), assailing the ordinance’s validity.
CEPALCO argued that the tax imposed was essentially an income tax, which a city government is expressly prohibited from imposing under Section 133(a) of the Local Government Code (LGC). It further claimed exemption from any local tax by virtue of its franchise granted under Republic Act No. 9284 . The RTC upheld the ordinance and denied CEPALCO’s claim of exemption. The Court of Appeals affirmed the RTC decision, prompting CEPALCO to elevate the case to the Supreme Court via a petition for review.

ISSUE

The primary issue is whether Ordinance No. 9503-2005 is a valid exercise of the City of Cagayan de Oro’s taxing power, or if it is an unconstitutional income tax and if CEPALCO is exempt from its application.

RULING

The Supreme Court denied the petition and upheld the validity of Ordinance No. 9503-2005. The Court ruled that the ordinance imposes a valid local business tax, not a prohibited income tax. The legal logic is grounded in the distinction between the nature of an income tax and a privilege tax on business. An income tax is levied on the net income or profit realized from business, while a business tax is imposed on the conduct of business or the exercise of a privilege, often measured by gross sales or receipts. The ordinance taxes the business of leasing poles, using the gross annual rental income as the tax base. This is explicitly authorized under Section 143(h) of the LGC, which allows municipalities (and cities under Section 151) to tax any business not otherwise specified.
The Court further ruled that CEPALCO is not exempt from this local business tax. While its previous franchise laws contained an “in lieu of all taxes” clause, its current franchise under R.A. No. 9284 contains no such provision. Section 193 of the LGC provides that tax exemptions granted to entities must be expressly stated in a statute; it also authorizes local government units to withdraw such exemptions. The absence of an explicit exemption in R.A. No. 9284 means CEPALCO is subject to ordinary taxes, including the local business tax levied by the ordinance. The tax is a valid regulatory measure on the business activity of leasing poles, which is separate from CEPALCO’s primary franchise to operate a power utility.